Airline startups take off post-pandemic

At first glance, this may seem counter-intuitive for an industry where the costs of assets can be the biggest barrier to entry. While there are early signs of life as COVID-related restrictions ease, global passenger volumes remain stifled by the pan­demic as the virus comes and goes in waves.

Despite this, there is a growing consensus that many startups are launching from positions of strength and, at last count, at least 90 prospective airlines are at various stages of investment. Most, if not all, are proposing derivatives of the low-cost models proven by budget giants such as Ryanair, easyJet, Southwest Airlines and AirAsia.

Investors are attracted by evidence that aircraft leasing rates have fallen significan­tly since the start of the pandemic. The world’s aircraft parking lots have swelled with laid up second-hand models and crept up from historic lows as demand rises. The implications are that new carriers are likely to enter markets unencumbered by the debts and fixed costs carried by legacy carriers.

In 2020, global airlines amassed more than $180 billion worth of debt as their business struggled to survive the commercial ravages of a global pandemic. Many of the prospective new airlines are expected to rise from the ashes of companies that failed as the spread of the virus decimated industry profits.

However, the current market conditions appear to have created an environment where startups can control short-term expenditure and find the range of skilled workers they require; two critical conditions for success in this capital-intensive industry.

For the thousands of pilots and other skilled aviation staff who were furloughed or let go as established carriers looked to cut costs, startups are an opportunity to return to the ranks of the full-time employed.

Time-critical take-off and landing slots at preferred airports appear to be more easily secured, and with some established carriers now focused on survival, they may be less inclined to defend non-core routes against these new operators.

These shifting commercial conditions have led to suggestions from at least one startup that the cost of starting a new airline is now 40% lower than pre-pandemic levels.

While the capital-related barriers to entry appear reduced for startups, other new market conditions – such as continued restrictions on cross-border travel – will continue to influence the success of any new business models.

For example, with cross-border travel uncertain for the near future, pre­sent conditions would appear to favour new carriers operating within markets such as the U.S. and the EU, rather than those with business models that depend on international demand, even from island hotspots for tourism.

The vast majority of startups are expected to focus on low-cost, short-haul models, but there are some carriers deploying low-cost long-haul services on routes where market capacity has been recently scaled back, or where other airlines have failed.

With infection rates from the virus easing in several key markets, the first signs of pent-up demand are emerging; those early returns appear to suggest pleasure will come before business this time, as a pandemic-weary public seeks a reprieve from the fatigue of lockdown.

Business travel, which accounted for as much as 75% of airlines’ pre-pandemic revenue on some routes, will take longer to return, as companies continue to monitor costs, encour­age employees to work remotely, and eval­uate the trade-offs inherent in telecon­ferenc­ing verses face-to-face meetings with clients. In support of this argument the consultants McKinsey, recently suggested that business-class travel will not return to 2019 levels until 2024, if it does at all.

Well-heeled startups may have the option of building their fleets with the benefit of manufacturers’ discounts; for most, however, capacity is likely to be built from a fleet of aircraft that may have been idle for some time. This prospect nevertheless poses risks.

The amount of maintenance it takes to return aircraft to a ‘flight ready’ condition broadly corres­ponds with the length of time they were idle; the longer the storage time, the heavier the maintenance load.

If a new airline intends to commence operations gradually with one or two aircraft on a specific route, it may not have all the required maintenance, repair and operations (MRO) capabilities in-house. This adds cost and can make operations vulnerable to the quality and availability of third-party MRO services.

Not all challenges and risks for startups are asset-related. Rust can also gather on the pilots’ skills after long lay-offs so they will need retraining and other upgrades, according to a recent report in the N.Y. Times. The increase in unstabilised approaches has also been recently documented by IATA.

Whether new carriers plan to start operations with one aircraft or ten, owning an airline is a complex, capital-intensive business. Understanding the wider risk landscape and accessing the right insurance to cover a new airline’s operating risks and regula­tory obligations is another complex challenge facing many startups, but one that can be successfully achieved with the right insurance partner.

If you wish to discuss the risks and insurance requirements of a startup airline, please contact: